China has reached a naval milestone on Friday by launching a new aircraft carrier. Its name sends a clear signal: Fujian, the mainland province across the strait from Taiwan.
This warship is China’s first fully domestically developed carrier with catapult aircraft launch. Its previous two vessels have had their roots in Ukraine. The first carrier was built from a second-hand, partially-complete hull of a Soviet Kuznetsov-class aircraft carrier. The second version was designed largely on the first carrier.
The timing follows ever seething tensions with Taiwan and the US. President Xi Jinping has expanded China’s military presence in disputed South China Sea areas and the Indo-Pacific region. This new carrier should increase the maritime range of China’s military to both Taiwan and Japan.
Despite the diplomatic strains, China spends relatively conservatively on defence — Rmb1.5tn ($224bn) budgeted this year — a far cry from the US budget of $773bn. Beijing has pledged to modernise its armed forces, suggesting that expenditure gap will narrow. The 7 per cent rate of increase in this year’s budget outpaces the rates of the last two years, according to Janes.
More defence outlays will benefit a select few local groups able to manufacture the latest technologies. A shipyard subsidiary of China State Shipbuilding Corp, the world’s largest commercial shipbuilder, produced the Fujian. Local jet maker AviChina Industry & Technology is another chosen supplier for the military.
Both companies’ share prices have lost about a quarter this year, with AviChina trading at just 9 times forward earnings. These two companies have a built-in hedge. When military revenues fall, they can fall back on their core businesses — lightweight cargo aircraft, crop seeding planes and liquefied natural gas tankers.
President Xi Jinping vowed China would become a “world-class” military power. If so, its military industrial complex will certainly grow to achieve its own self-sufficiency.
Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.